Current Dividend Preference

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DEFINITION of 'Current Dividend Preference'

A safety feature of preferred shares, whereby holders of such shares are entitled to receive dividends before common shareholders. Current dividend preference means that preferred shareholders have priority or preference over common shareholders when it comes to dividend distributions. This feature implies that under no circumstances can dividends be paid to common shareholders before preferred shareholders.

BREAKING DOWN 'Current Dividend Preference'

Dividend distributions depend on a number of factors such as the company's operating performance, level of retained earnings and payout ratio. While dividend payments on common shares are largely at the company's discretion, preferred dividends generally have a greater degree of stability. For example, consider a company, Widget Co., that has 4 million preferred shares with a face value of $25 outstanding; these shares have a stipulated dividend of 5%. Widget Co. also has 100 million common shares outstanding, on which it has been paying dividends of 20 cents. This means that Widget Co. pays out $5 million in preferred dividends and $20 million in common share dividends. If Widget Co. has a healthy financial position and is consistently profitable, paying these dividends should not cause it any problems. If it has a couple of unprofitable or marginally profitable years, however, it may consider trimming dividends on its common stock, or even suspending them altogether. But even in this scenario, it must pay the preferred shares dividend, either in this period or at a later date.

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RELATED FAQS
  1. What is the difference between preferred stock and common stock?

    Preferred and common stocks are different in two key aspects. First, preferred stockholders have a greater claim to a company's ... Read Full Answer >>
  2. Does issuing preferred shares offer a tax advantage for corporations?

    There is no direct tax advantage to the issuing of preferred shares when compared to other forms of financing such as common ... Read Full Answer >>
  3. How do dividends affect the balance sheet?

    Dividends paid in cash affect a company's balance sheet by decreasing the company's cash account on the asset side and decreasing ... Read Full Answer >>
  4. Who actually declares a dividend?

    It is a company's board of directors who actually declares a dividend. The declaration date is the first of four important ... Read Full Answer >>
  5. Where exactly do dividends come from?

    Companies pay dividends in cash, which typically come from the companies' cash flows from operations by selling goods and ... Read Full Answer >>
  6. Are dividends considered an expense?

    Cash or stock dividends distributed to shareholders are not considered an expense on a company's income statement. Stock ... Read Full Answer >>

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